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Sunday, May 24, 2009

Now Do Something about Bank Fees, Please!

President Barack Obama has signed into law extensive new restrictions on the ability of US credit card companies to charge fees or raise interest rates.

The BBC summarizes the major changes effected by this “Credit Card Holders’ Bill of Rights” and Boston.com offers even more detail. Just a few highlights:

Creditors cannot increase the annual percentage rate (APR) during the first 12 months of opening up an account.

Creditors are prohibited from opening a credit card account for any college student who does not have any verifiable annual gross income or already maintains a credit card account with that creditor, or any of its affiliates.

Creditors are prohibited from charging a fee to make telephone and web-based payments.

Creditors [must stop] charging fees for [cardholders’] spending beyond their limits, unless the cardholder chooses to allow the issuer to process the excess spending, and restrict any "over-limit" fees.

So, good on that front.

But these damned banks!

It’s bad enough that they pay debit transactions from largest to smallest to maximize the overdraft fees you pay.* An example:

Here’s how it works: Say you have $1,000 in your account and make a series of debit transactions in this order: $25, $300, $10, and $750. Only that last $750 charge will have put you over the limit of your account (in this case, by $85). However, if the bank reorders your debits as: $750, $300, $25, and $10, you’ll be overdrawn as of the second transaction, allowing the bank to collect three overdraft fees instead of one.

If a charge will overdraw a customer's account, why don’t banks simply decline it or at least warn customers that they’re about to overdraw? Well, banks love collecting that average overdraft fee of $34!

In 2007 alone, banks and credit unions collected $17.5 billion from overdraft fees, according to the nonprofit Center for Responsible Lending (CRL). CRL has also found that the overwhelming majority of customers, 80 percent, would prefer that their debit card transaction simply be denied rather than covered for a fee.

For a few years now, Rep. Maloney has been working on legislation that would offer customers some relief from the overdraft racket. In her words:

I have reintroduced the Consumer Overdraft Protection Fair Practices Act(H.R. 1456) in the U.S. Congress, which would require notice to customers at the ATM or point-of-sale terminal when a purchase is about to trigger an overdraft -- and would give consumers at the transaction point a choice of whether to accept or reject the overdraft service and associated fee.

My bill would also require banks to get their customers' permission before signing them up for an overdraft program, and it would prohibit banks from manipulating the sequence in which checks and other debits are posted if it causes more overdrafts and maximizes fees.

Debit-card overdraft loans are more expensive than overdraft loans from any other source, including overdrafts by check. Debit-card overdrafts cost people $2.17 in fees for every dollar borrowed, compared to check overdrafts, which cost $.86 per dollar borrowed.

Most debit point-of-sale overdrafts are small, averaging less than half this $34 fee, meaning that these overdraft loans cost nearly $2 for every dollar advanced to cover the shortfall.

Banks claim to do customers a favor by automatically enrolling them in “overdraft protection.” Belying their generosity is the fact that many banks don’t allow customers to opt out of the involuntary overdraft protection plans—I can’t understand why they don’t get customers’ permission first, especially given the fact that most would prefer the transaction(s) be denied.

Bankers are resistant to changes like those proposed by Rep. Maloney. Says one Fred Solomon, all you have to do to avoid the charges is know your balance! Only, in the real world, if you’re out running errands or you make a number of small transactions, it’s sometimes difficult to keep a running balance at all times. Also, some of us fallible people make errors in subtraction and addition. Balances fluctuate, particularly when you use your debit card: a transaction might appear as an authorization, disappear, then reappear days later and wreak havoc on our accounts. Sometimes, companies place a hold on more funds than we actually use, lowering our available balances and potentially causing us to overdraw while the funds are on hold. And I know I can't be the only person who's written a check, noted it in my register, but weeks later, when I'm four pages further on in the register, the long-held check posts to my account and I have to adjust my balance because I'd forgotten about it.

Overdraft fees disproportionately affect the young—who use their cards more and make more small purchases—and people with low incomes—who can ill afford to pay back the exorbitant fees. On top of the fees themselves, some banks charge a daily or weekly fee if your account is in the red. With regards to low-income bank customers, bankers’ admonishments that you can easily track your balance via text message or online banking is especially hollow. Many people with low incomes don’t have contract cell phones (which typically require credit). On the pre-paid plans** (problematic, in and of themselves), text messaging costs extra.

Online banking is not always at their fingertips. We've long noted the digital divide between "the rich and the poor." Having internet access at home could mean 1) having to have a landline,*** which requires credit, the ability to pay the monthly bill, and the willingness to increase that bill by as much as $50 or $60 to include internet service and 2) being able to afford a computer and related upkeep. I was also angrily amused by this little helpful tip (found, admittedly, in an article that is wary of banks and debit cards but only because it suggests credit cards as a better alternative):

Keep a cushion of money in your account to avoid bouncing checks or debits. Decide that you are not going to let your account fall below a certain amount, like $1,000; when you see it getting close, transfer money into it from another account. If you don’t have the money to replenish it, then you should cut back on spending.

A cushion? A thousand dollars? Multiple accounts with money in them? Umm…

A couple of years ago, my small-town Louisiana bank began to engage in an even more insidious practice. Let’s say you have $15 in the bank. You use your debit card for $6. That authorization reduces your available balance to $9. A $12 check posts to your account that night. You are charged a $34 fee for that, even though the debit card transaction is still only in authorization or memo-post stage. Now your account is in the red, -$37. Well, the next night, when the $6 actually posts to your account, you are charged for that, as well. Now, initially you had $15—shouldn’t one or the other of those transactions have been paid without fee, since they were both below $15? And if the reason the check caused a fee was because money was withheld from your balance for the debit card transaction—why do you have to pay a fee on the debit card transaction?

I remember reading an article about other banks doing it last summer, but I can’t find it! What I did find was this more succinct explanation in the comments here:

Some banks use a process called paid on available and a pending debit card transaction will hold the "available" balance before the transaction even posts to the account.

This can cause other items to overdraw the "available" balance, causing an overdraft, plus when the actual transaction goes through, it will charge an additional overdraft if still negative. Basically, a pending debit card transaction can cause 2 overdraft fees using this method.

Another description is here. In addition to the double charge the first commenter I mentioned discusses, I am also particularly troubled by the fact that this can happen with debit card purchases (not just the check example I used)--you swipe your card, go over, you're immediately assessed a fee, even if you make a deposit before the end of the banking day.

I'm not at all saying that customers should overdraw their accounts and face no penalties. What I'm asking is, with the way the practice is (d)evolving, how is this distinguishable from predatory lending--excessive rates and fees that disproportionately affect the most vulnerable customers while banks find more and more ways to assess them? I mean, while reading, I ran across articles that mentioned that not only are customers not warned they're overdrawing their accounts and being extended credit they didn't ask for, but banks that do set a number of maximum overdrafts per day set the number high, at six or seven, so that you can rack up $200+ in charges in one day. Like payday loans, overdraft fees can dig you into a hole out of which it seems impossible to climb. You don't even opt-in or get info on the ridiculous interest rates of what amounts to an overdraft loan.

So while I am glad for the Credit Card Holders’ Bill of Rights, please, somebody, do something about these banks!

ETA: This video explains the "Gotcha Fees" and the disproportionate effect on the young:

1 comment:

These kinds of things ought to drive people to do their banking at credit unions. I worked for one of the largest credit unions in the country and they just didn't pull crap like this. I still have my main account there.